Saturday, 27 October 2012

Dan Buettner has a great article, The Island Where People Forget to Die, that looks at the Greek island of Ikaria where the local residents seem to live much longer than other Greeks, or indeed other people. A couple of things stand out for me: diet, lifestyle and the social conditions that cause them. The article is fairly long but it's well worth a read.

See what all this proves? As well as redistributing income from rich to poor, the budget acts as a giant, multi-faceted mutual support scheme. At some points in your life you're a net contributor, at others a net recipient.

The system requires those without dependents to subsidise those with, particularly when the little blighters need educating. It requires the well to subsidise the sick. It requires those who work to subsidise those too old to work.

I think it's a good system, a sign we live in a reasonably caring, civilised society, where those in need get supported by the rest of us.

It's a reason we should pay our taxes with a lot less grumbling. The pity is, the system's so complex and convoluted it's not until you see a special study such as this that you realise how it works - it's inbuilt fairness and solidarity.

Something to think about next time you're tempted to justify a demand on government because you've ''paid taxes all my life''. You've also been benefiting all your life.

Michael Greenstone and Adam Looney have looked at the decline in wages of many American workers in The Uncomfortable Truth About American Wages. They argue that the decline is actually worse than that reported because it is masked by changing role of women in the workforce and by the decrease in the male participation rate (the statistic only records people with jobs).

When we consider all working-age men, including those who are not working, the real earnings of the median male have actually declined by 19 percent since 1970. This means that the median man in 2010 earned as much as the median man did in 1964 — nearly a half century ago. Men with less education face an even bleaker picture; earnings for the median man with a high school diploma and no further schooling fell by 41 percent from 1970 to 2010.

They also report that women are also starting to see a decline in earnings:

Since 1970, the earnings of the median female worker have increased by 71 percent, and the share of women 25 to 64 who are employed has risen to 71 percent, from 54 percent. But after making significant wage gains over several decades, that progress has slowed and even reversed recently. Since 2000, the earnings of the median woman have fallen by 6 percent.

The authors attribute the downturn to a number of factors including "technological change, international trade and the decline of unions". However, what they are really concerned about seems to be the decline in skills and education:

Many of these forces have been around since the 19th century, but today, for what may be the first time in American history, we are failing to invest enough in our skills and productivity to stay ahead of these trends, and the impacts of this failure are reflected in the declining wages of many American workers.

Greenstone and Looney recommends improvements to the education system including college completion rates.

Wednesday, 17 October 2012

For most of my adult life I was an avid reader of The Australian and The Weekend Australian. I have to say that its been several years since I purchased either paper. With one exception I now no longer trust anything in The Australian or it's Saturday stablemate. The exception is the writing of George Megalogenis (but even then you sometimes need to ignore the headline).

Why don't I trust The Australian? I feel that it's no longer a newspaper of record. Instead it seems to have become an agenda driven publication. There is no way for me to tell if an article is accurate or biased. To me the Australian is no longer impartial.

I also find the paper incredibly arrogant and thin skinned, even bullying and vindictive. Woe betide anyone who criticises The Australian.

All this is a shame as The Australian can be a very good newspaper at times. It has carried out and reported on investigations that any editor would be proud of. But for me that's now all for nought, because as I said, I no longer trust it. Nor do I need it any more, the Internet now brings me other sources of news.

It is widely reported that The Australian runs at a loss and that Rupert Murdoch keeps it going for the influence it brings. But, one day Rupert will be gone. When that day comes many expect his replacement to close the loss making venture. I will be saddened when The Australian dies. Not for the loss of what The Australian now is, but for the loss of what it might have been.

Chrystia Freeland, in The Self-Destruction of the 1 Percent argues that growing economic inequality in the USA will likely result in a long term decline in that country's economic well being. She compares the situation in the USA to the decline in Venice.

The story of Venice’s rise and fall is told by the scholars Daron Acemoglu and James A. Robinson, in their book “Why Nations Fail: The Origins of Power, Prosperity, and Poverty,” as an illustration of their thesis that what separates successful states from failed ones is whether their governing institutions are inclusive or extractive. Extractive states are controlled by ruling elites whose objective is to extract as much wealth as they can from the rest of society. Inclusive states give everyone access to economic opportunity; often, greater inclusiveness creates more prosperity, which creates an incentive for ever greater inclusiveness.

The history of the United States can be read as one such virtuous circle. But as the story of Venice shows, virtuous circles can be broken. Elites that have prospered from inclusive systems can be tempted to pull up the ladder they climbed to the top. Eventually, their societies become extractive and their economies languish.

Tuesday, 16 October 2012

[P]rovides a macroeconomic database for Australia which includes measures of GDP, its components, prices, and key monetary and labour market statistics over the last fifty years as published and revised in real time. The vintages of data are collated from various sources and accommodate multiple definitional changes, providing a comprehensive description of the macroeconomic environment as experienced by Australian policy- and decision-makers.

IF YOU listen to business, we still have big problems with the labour market. John Howard deregulated it, but then Julia Gillard reregulated it, and now we can't do a thing with it.

The business people are right to this extent: with an economy under so many pressures for change - the rise of the emerging market economies and the resources boom it has produced, the digital revolution, the return of the prudent consumer, and more - we do need a labour market that's ''flexible''.

But what exactly does flexibility mean? Well, not what some bad employers think: unilateral freedom to change their staff's working arrangements without recompense or consultation. That's one-sided flexibility.

No, what flexibility should mean is the ability of the labour market to adjust to shocks that hit the economy without generating excessive inflation or unemployment. There is some, but it doesn't linger for years. Another word for it is ''resilience'', the ability to take a punch, then bounce back. So how are we doing there? A lot better than business would have you believe.

Sally Baxter in Mussel flexing women destroy the joint has fleshed out some of the history to the recent controversy over Julia Gillard's speech in Parliament attacking Tony Abbott's sexism. Well done.

Since the 1970s, southern Australia — and other areas of the Southern Hemisphere —have seen decreased levels of rain between April and May, which is autumn in that part of the Earth. But what's causing this extended drought?

Previous research has pointed the finger at a southward shift in storm tracks and weather systems during the late 20th century.

But a study published today (Oct. 4) in the journal Scientific Reports takes the explanation one step further. Its findings suggest that changing storm patterns and the ensuing droughts are due to a southern shift in the Hadley cell, the large-scale pattern of atmospheric circulation that transports heat from the tropics to the subtropics.

The southward march of this circulation pattern has been greatest in the autumn, and has disproportionately affected southeastern Australia, according to a release describing the study from the Commonwealth Scientific and Industrial Research Organisation (CSIRO).

In Australia, it's led to a shift in the "subtropical dry zone," a region that stretches around the world and receives little rain, by 125 to 250 miles (200 to 400 kilometers) to the south. That's bad news for ecosystems in the area, which rely on fall rain to recharge.

Emerging research suggests that the growing gap between rich and poor harms the U.S. economy by creating instability and suppressing growth.

The essay appears to argue three points:

Rising inequality reduces demand within the economy. This is because the rich tend to spend a smaller proportion of their income than those on lower incomes.

To make up for this lower demand, Governments and banks ease credit requirements, thus creating a credit splurge.

All the income at the top needs somewhere to go. It tends to end up in the financial markets and other forms of investment with high liquidity. In the US the financial sector ended up making up around 40% of the total profits in the economy. To quote the essay: "Alas, when the recession struck, the financial sector’s gigantism and complexity helped turn what might have been a brush fire into a meltdown."

This all results in an unstable economy that far from being resilient to shocks actually amplifies them.

In his speech Dr Parkinson discussed the rise of Asia on Australia's economy:

The consequences of the growth of emerging Asian economies can be characterised as coming in three waves. The first wave is the expansion of the mining sector that we are currently experiencing, most notably here in Western Australia. The second is the growing global demand for our agricultural products. And the third is the rise of the middle class in the Asia-Pacific region.

He also discussed some of the issues around tax reform.

One issue he also touched on was that of our perception of our economy:

Joining Professor Ross Garnaut and me on the panel were Professor He Fan from the Chinese Academy of Social Sciences, and Masahiko Takeda of the IMF. Mr Takeda and Professor He Fan both commented on what they, as outside observers, perceived as the strange disconnect between Australia's economy and Australians' perception of it.

Despite the continually good news about our short-term and medium-term prospects from sources like the OECD and the IMF, there is considerable, persistent and, in my view, unwarranted pessimism.

I wonder how much of the pessimism we express is due to the fact that our Governments are not running large surpluses? Perhaps the income tax cuts promised in the 2007 election, and delivered during the GFC, have not just cost our budget dearly; perhaps they have also indirectly had a negative effect on our mood.

Anyway, judging by the transcript, it appears to have been an interesting speech.

SINCE the crisis hit in 2008, there has been a sharp divide between those who believe that the monetary authorities have been insufficiently aggressive and those who believe that central banks have done everything possible given that households and businesses have no interest in taking on new debts. For what it’s worth, a poll of more than 300 research associates at America’s National Bureau of Economic Research conducted for an article in the print edition reveals that the overwhelming majority (76%) believe that monetary policy has not been too tight. Nearly half believe that fiscal rectitude has been a principal cause of the slow recovery.

The article then goes on to explain why monetary policy hasn't been effective. It concludes with:

None of this is to say that asset purchases, statements about the future path of inflation and nominal income, or interventions in the foreign exchange markets will have literally no effect. However, it seems clear that current circumstances are causing these monetary policy actions to be far less effective than they otherwise would be. Marginal spenders are constrained by their desire (or need) to retrench. Most of the people who get the biggest benefit from central bank action are the people who already own lots of financial assets (the rich).

The fiscal authorities need to step up and do the job that the central banks cannot. Specifically, by running large budget deficits, governments can maintain the total level of spending in the economy while allowing households and businesses to repay their debts and accumulate savings. This is not a new insight, but it has gained popularity in the last few years thanks to the work of Richard Koo, the chief economist of the Nomura Research Institute who coined the term “balance sheet recession” to describe what happened to Japan after the collapse of its asset bubble in the early 1990s. (The paper is well worth reading in full.) Unfortunately, many governments across the globe seem more concerned with the abstract goal of balancing their budgets than with the important task of restoring their economies to health.

Recommended reading, as is the paper by Richard Koo in the above link. Here's where Koo explains how problems caused by the GFC could cause a depression if not correctly treated:

More importantly, when the private sector deleverages in spite of zero interest rates, the economy enters a deflationary spiral because, in the absence of people borrowing and spending money, the economy continuously loses demand equal to the sum of savings and net debt repayments. This process will continue until either private sector balance sheets are repaired or the private sector has become too poor to save (i.e., the economy enters a depression).

To see this, consider a world where a household has an income of $1,000 and a savings rate of 10 percent. This household would then spend $900 and save $100. In the usual or textbook world, the saved $100 will be taken up by the financial sector and lent to a borrower who can best use the money. When that borrower spends the $100, aggregate expenditure totals $1,000 ($900 plus $100) against original income of $1,000, and the economy moves on. When demand for the $100 in savings is insufficient, interest rates are lowered, which usually prompts a borrower to take up the remaining sum. When demand is excessive, interest rates are raised, prompting some borrowers to drop out.

In the world where the private sector is minimizing debt, however, there are no borrowers for the saved $100 even with interest rates at zero, leaving only $900 in expenditures. That $900 represents someone’s income, and if that person also saves 10 percent, only $810 will be spent. Since repairing balance sheets after a major bubble bursts typically takes many years — 15 years in the case of Japan — the saved $90 will go un-borrowed again, and the economy will shrink to $810, and then $730, and so on.

This is exactly what happened during the Great Depression, when everyone was paying down debt and no one was borrowing and spending. From 1929 to 1933, the U.S. lost 46 percent of its GDP mostly because of this debt-repayment-induced deflationary spiral. It was also largely for this reason that the U.S. money supply shrank by nearly 30 percent during the four-year period.

The discussion above suggests that there are at least two types of recessions: those triggered by the usual business cycle and those triggered by private sector deleveraging or debt minimization. Since the economics profession never considered the latter type of recession, there is no name for it in the literature. In order to distinguish this type of recession from ordinary recessions, it is referred to here as a balance sheet recession. Like nationwide debt-financed bubbles, balance sheet recessions are rare and, left untreated, will ultimately develop into a depression.

Koo also makes a very important point:

Flow of funds data for the U.S. (Exhibit 9) show a massive shift away from borrowing to savings by the private sector since the housing bubble burst in 2007. The shift for the private sector as a whole represents over 9 percent of U.S. GDP at a time of zero interest rates. Moreover, this increase in private sector savings exceeds the increase in government borrowings (5.8 percent of GDP), which suggests that the government is not doing enough to offset private sector deleveraging.

Koo later writes:

Countries in balance sheet recessions such as Spain are desperately in need of fiscal stimulus but are unable to take advantage of the rapid increase in domestic savings and are therefore forced to engage in fiscal conso lidation of their own. That causes the aforementioned $100 to be removed from the income steam, prompting a deflationary spiral. And since the countries receiving those savings are not borrowing and spending them, the broader eurozone economy is rapidly weakening. It is no wonder that the Spanish unemployment rate is over 21 percent and Irish GDP has fallen more than 10 percent from its peak.

Fund flows within the eurozone were following the opposite pattern until just a few years ago. Banks in Germany, which had fallen into a balance sheet recession after the telecom bubble collapsed in 2000, aggressively bought the debt of southern European nations, which were denominated in the same currency but offered higher yields than domestic debt. The resulting capital inflows from Germany poured further fuel onto the fire of housing bubbles in these countries.

There is thus a tendency within the eurozone for fund flows to go to extremes. When times are good, funds flow into booming economies in search of higher returns, thereby exacerbating the bubbles. When the bubbles finally burst, the funds shift suddenly to the countries least affected by the boom.

The problem with these shifts is that they are pro-cyclical, tending to amplify swings in the economy. Countries that are in the midst of a bubble and do not need or want additional funds experience massive inflows. Meanwhile, countries facing balance sheet recessions and in need of funds can only watch as money flows abroad, preventing their governments from implementing the fiscal stimulus needed to stabilize the economy.

[...]

One way to solve this eurozone-specific problem of capital shifts would be to prohibit member nations from selling government bonds to investors from other countries. Allowing only the citizens of a nation to hold that government’s debt would, for example, prevent the investment of Spanish savings in German government debt. Most of the Spanish savings that have been used to buy other countries’ government debt would therefore return to Spain. This would push Spanish government bond yields down to the levels observed in the U.S. and the U.K., thereby helping the Spanish government implement the fiscal stimulus required during a balance sheet recession.

The Maastricht Treaty with its rigid 3 percent GDP limit on budget deficits made no provision for balance sheet recessions. This is understandable given that the concept of balance sheet recessions did not exist when the Treaty was being negotiated in the 1990s. In contrast, the proposed new rule would allow individual governments to pursue autonomous fiscal policies within its constraint. In effect, governments could run larger deficits as long as they could persuade citizens to hold their debt. This would both instill discipline and provide flexibility to individual governments. By internalizing fiscal issues, the new rule would also free the European Central Bank from having to worry about fiscal issues in individual countries and allow it to focus its efforts on managing monetary policy.

In order to maximize efficiency gains in the single market, the new restriction should apply only to holdings of government bonds. German banks should still be allowed to buy Greek private sector debt, and Spanish banks should still be allowed to buy Dutch shares.

In retrospect, this rule should have been in place since the beginning of the euro. If that were the case, none of the problems the eurozone now faces would have materialized. Unfortunately, the euro was allowed to run for more than ten years without the rule, accumulating massive imbalances along the way. It may take many years to undo the damage.

Koo concludes with:

It is laudable for policy makers to shun fiscal profligacy and aim for self-reliance on the part of the private sector. But every several decades, the private sector loses its self-control in a bubble and sustains heavy financial injuries when the bubble bursts. That forces the private sector to pay down debt in spite of zero interest rates, triggering a deflationary spiral. At such times and at such times only , the government must borrow and spend the private sector’s excess savings, not only because monetary policy is impotent at such times but also because the government cannot tell the private sector not to repair its balance sheet.

Although anyone can push for fiscal consolidation in the form of higher taxes and lower spending, whether such efforts actually succeed in reducing the budget deficit is another matter entirely. When the private sector is both willing and able to borrow money, fiscal consolidation efforts by the government will lead to a smaller deficit and higher growth as resources are released to the more efficient private sector. But when the financial health of the private sector is so impaired that it is forced to deleverage even with interest rates at zero, a premature withdrawal of fiscal stimulus will both increase the deficit and weaken the economy. Key differences between the text book world and the world of balance sheet recessions are summarized in Exhibit 17.

With massive private sector deleveraging continuing in the U.S. and in many other countries in spite of historically low interest rates, this is no time to embark on fiscal consolidation. Such measures must wait until it is certain the private sector has finished deleveraging and is ready to borrow and spend the savings that would be left un-borrowed by the government under an austerity program.

There will be plenty of time to pay down the accumulated public debt because the next balance sheet recession of this magnitude is likely to be generations away, given that those who learned a bitter lesson in the present episode will not make the same mistake again. The next bubble and balance sheet recession of this magnitude will happen only after we are no longer here to remember them.

Richard Chirgwin in The revolting invasion of American evangelists highlights the fact that the Cori Bernardi's slippery slope argument against gay marriage is actually a copy of the argument used by evangelicals in the USA who used it to campaign against gays in the military.

This doesn’t surprise me: Bernardi has always struck me as too stupid for invention. He is an organizer, a numbers man, an idea-free careerist, all balls, no brains.

Go back just a little distance in America, Land of the Unhinged. The debate was about permitting the military to acknowledge that some of its members are gay. Simple statistics would tell you that, but nobody was allowed to say so, in a delicious paradox for a country that deifies its First Amendment.

And out among America’s theocrats-in-waiting was the same theme. The repeal of laws banning acknowledged* homosexuality in the military was – go on, guess – touted as permitting bestiality. If you need some references, there’s this or this.

Chirgwin goes on to write:

In other words, the link – the “slippery slope” argument that draws an utterly kooky continuum starting at sex with a human and ending at sex with a different species – goes back at least that far.

It’s just another piece of the detestable invention of American snake-oil evangelism. It’s not even Bernardi’s own idea. He’s just spouting someone else’s drivel at us.

And that drivel is the demon spawn of hardline evangelistic American religion, which has been trying to invade Australia, infest our thought, and pollute our politics. In at least the latter, they have succeeded. And in the latter, Cori Bernardi - who seems to owe his loyalties to someone in the USA more deeply than anyone in Australia - deserves not a slap on the wrist, but the loss of his endorsement.

As Chirgwin writes:

If “sex with a man” or “sex with a woman” is on the same continuum as “sex with a sheep”, then doesn’t heterosexual sex sit on the same line?

It seems that too many policy makers and advisors have forgotten the errors of the great depression. But not Paul Krugman. In Europe’s Austerity Madness Krugman argues that all austerity is doing is inflicting additional pain on those that are already hurting. Why is this happening?

Part of the explanation is that in Europe, as in America, far too many Very Serious People have been taken in by the cult of austerity, by the belief that budget deficits, not mass unemployment, are the clear and present danger, and that deficit reduction will somehow solve a problem brought on by private sector excess.

Beyond that, a significant part of public opinion in Europe’s core — above all, in Germany — is deeply committed to a false view of the situation. Talk to German officials and they will portray the euro crisis as a morality play, a tale of countries that lived high and now face the inevitable reckoning. Never mind the fact that this isn’t at all what happened — and the equally inconvenient fact that German banks played a large role in inflating Spain’s housing bubble. Sin and its consequences is their story, and they’re sticking to it.

Worse yet, this is also what many German voters believe, largely because it’s what politicians have told them. And fear of a backlash from voters who believe, wrongly, that they’re being put on the hook for the consequences of southern European irresponsibility leaves German politicians unwilling to approve essential emergency lending to Spain and other troubled nations unless the borrowers are punished first.

The RBA probably made a mistake in 2009-10 in increasing interest rates.

High capital inflows, mostly for new LNG plants in Queensland are going to keep the Australian dollar high.

Mortgage rates are unlikely to drop to where they were last time the RBA cash rate was at this level; that's because the banks are facing higher international funding costs and more competition for deposits.

The high dollar and higher funding costs mean that monetary policy, and that means the RBA, isn't as effective as it once was.

He concludes with:

And no-one wants to borrow anyway. Manipulating the price of credit, which is all the RBA can do, is fine when credit is in demand. Now it's like manipulating the price of beef at a vegetarians' picnic.

The thing about not having much money is you have to take much more responsibility for your life. You can’t pay people to watch your kids or clean your house or fix your meals. You can’t necessarily afford a car or a washing machine or a home in a good school district…. [Romney] is a guy who sold his dad’s stock to pay for college, who built an elevator to ensure easier access to his multiple cars, and who was able to support his wife’s decision to be a stay-at-home mom. That’s great! That’s the dream. The problem is that he doesn’t seem to realize how difficult it is to focus on college when you’re also working full time, how much planning it takes to reliably commute to work without a car, or the agonizing choices faced by families in which both parents work and a child falls ill. The working poor haven’t abdicated responsibility for their lives. They’re drowning in it….

As economist Jed Friedman wrote in an online post for the World Bank, “The repeated trade-offs confronting the poor in daily decision making -- i.e. ‘should I purchase a bit more food or a bit more fertilizer?’ -- occupy cognitive resources that would instead lay fallow for the wealthy when confronted with the same decision. The rich can afford both a bit more food and a bit more fertilizer, no decision is necessary.” The point… is really, really hard to be poor. That’s because the poorer you are, the more personal responsibility you have to take.

Greg Jericho in Car sales as a speedo check for the economy looks at the impact of the GFC on new car sales. New car sales are a good indicator of the strength of the economy. He highlights the link between new car sales and GDP. Well worth a read.

NEARLY a decade of viral emails claiming refugees get taxpayer-funded cash, houses and other gifts denied to Australian citizens has been debunked by an independent study.

The emails stir up resentment towards asylum seekers settling here but are simply not true, according to the latest research paper by the Federal Parliamentary Library.

The research dismisses claims that refugees get cash payments, free houses and extravagant gifts.

"There is no truth to claims made in emails recently circulated throughout Australia that refugees are entitled to higher benefits than other social security recipients," says the study by social policy researcher Luke Buckmaster.

"Refugees have the same entitlements as all other permanent residents. They do not receive special refugee payments or special rates of payment."

It is, therefore, a little distressing to read in the Sydney Morning Herald that the austerity fanatics in the NSW want to add hospital outpatient clinics to the list of things they want to cut.

He goes on to write:

A point about the story itself: if the Herald thinks a private specialist visit only costs $300, it's completely deluded; first, because the private specialist doesn't have to constrain charges to the officially scheduled price; second, because those visits often include pathology. Shifting the path from the hospital to the private clinic means that service is also private.

Richard knows what he's talking about in this case because:

Those who know me - either in real life or on the Internet - will probably know that my wife has a chronic illness that keeps us intimately familiar with the inside of hospitals.

Describing things in full would take an essay, but the short version is that she suffers from an immune system disorder that has knock-on effects pretty much everywhere: at the last count, she's a regular with six specialists (immunology, gastro-enterology, vascular, renal, gynocology, dermatology).

Let's get back to George Megalogenis. George has written that the Federal Government collects the revenue and the states are in business of spending that money in providing services to their citizens. Unfortunately, I don't have a link to these comments. However he did recently state:

The four largest components of the typical state budget are spending on health, education, transport and police.

Health and education tend to take 25 per cent each of total spending, while transport and police divide a further 20 per cent between them.

So, what happens when the states decide not to provide that service? I guess we then need to ask if we still need them. Don't get me wrong, I think it far better that the states provide these services than the Commonwealth. The states are far closer to the coal face and more likely to be aware of the needs of the community. The problem is that some of the states seem to be putting ideology and politics above responsibility and service delivery.